The USDA finally released the final BCAP rule. Industry members believe it will reduce the low-grade lumber market distortions it previously caused.

By DeAnna Stephens BakerDate Posted: 12/1/2010

The release of the long-awaited final rules for the Biomass Crop Assistance Program (BCAP) by the U.S. Department of Agriculture (USDA) has relieved some industry fears of continuing market distortions for low-grade lumber. Under the final rule, USDA has resumed making the BCAP payments to eligible producers. The federal government suspended payments in February after the program swelled beyond initial expectations.

BCAP was created in the 2008 Farm Bill as a primary component of the domestic agriculture, energy, and environmental strategy to reduce U.S. reliance on foreign oil, improve domestic energy security, reduce carbon pollution, and spur rural economic development and job creation. It provides incentives to interested farmers, ranchers and forest landowners for the establishment and cultivation of biomass crops for heat, power, bio-based products, and biofuels.

“Domestic production of renewable energy, including biofuels, is a national imperative and that’s why USDA is working to assist in developing a biofuels industry in every corner of the nation,” said USDA Secretary Tom Vilsack. “By producing more biofuels in America, we will create jobs, combat global warming, replace our dependence on foreign oil and build a stronger foundation for the 21st century economy.”

Previous Market Distortions

The pallet industry experienced mostly negative effects from the original BCAP Notice of Funding Availability (NOFA) because the subsidy made it harder to source low-grade lumber material in some areas of the country. Producers opted to send logs and lumber to be ground for biomass energy instead of used for pallets and other low grade applications. Upward price pressure and reduced availability forced pallet manufacturers to compete more for low-grade.

“In certain markets, BCAP drove the price of wood biomass up to a point where it was about the same as pulpwood,” said William Perritt, executive editor of RISI’s Wood Biomass Market Report. “This reduced the incentive for producers to sort pulp-grade from biomass-grade wood, and forced some pulp mills to raise prices to compete with the subsidized market.”

Many in the forest products industry were concerned about the unintended consequences of the final rule if the government did not further restrict what qualifies for BCAP subsidies. Instead of stimulating the development of innovative technology and alternative energy crop markets as it was intended to do, the original BCAP created a new demand for low-grade lumber, causing distortions in the market felt painfully by the wood pallet manufacturing industry.

The USDA seems to have listened to these concerns, releasing a final rule that has received a mostly favorable response from the overall forest products industry.

“Secretary Vilsack and the staff of USDA, took seriously the concerns raised by various stakeholders during the comment process and produced a rule that is a win-win for jobs critical to our rural economy while positioning our country to make greater use of environmentally-friendly renewable energy sources,” said Donna Harman, president and CEO of the American Forest & Paper Association (AF&PA).

Eligible Materials

USDA addressed the market distortion issue under the final rule by giving a more restricted definition of “eligible materials.” It extended the 2008 Farm Bill specification that material removed from federal land is not eligible if it would otherwise be used for higher-value products to material from all land not under a BCAP contract. In addition, it clarifies the definition of “higher-value product” as an existing market product that is comprised principally of an eligible material or materials which have an existing market as of the publishing of the rule on Oct. 27, 2010.

The new rule states that “higher-value products may include, but are not limited to, products such as mulch, fiberboard, nursery media, lumber, or paper, or a product manufactured from eligible materials from which eligible materials must be separated in order to be used for heat, power, biobased products, or advanced biofuels.” The rule does make exceptions for regional differences, however, allowing eligible materials that are considered to be used for a higher value product to qualify for matching payments if no higher value product market exists in that region. Although the new rules do not specifically name wooden pallets as a higher-value product, it makes sense that wooden packaging would be classified as such given its higher dollar value than other products mentioned by USDA.

The Federal Register further clarified the purpose of BCAP. USDA stated, “BCAP is for the use of materials that would otherwise be waste materials and that would go uncollected or unharvested.”

BCAP seeks to encourage use of waste material from the land not manufacturing processes. For example, sawdust collected from processed trees after the trees are delivered to a wood products facility cannot qualify for matching payments under this new rule. Sawdust collected directly from the forestland before delivery to a facility may qualify for matching payments as long as the government determines there is no higher-value product market, such as particle board, in that local area.

“We appreciate USDA’s consideration of industry concerns and the modifications made in the rulemaking process that will minimize market distortions and focus on supply,” said Donna Harman of AF&PA. “USDA’s revised approach on BCAP helps preserve existing jobs while also increasing renewable energy development particularly in rural communities.”

Qualifications for matching payments is based on the sequence of collection, harvest, transportation and delivery, further restricting eligible materials. The rule allows only those collected or harvested directly from the land, before transport and delivery, to be eligible. Materials cannot be “collected or harvested” after transport and delivery, nor “collected or harvested” by separating from a higher value material in order to be used for heat, power, bio-based products or biofuels. The rule requires that woody eligible material collected or harvested must come directly from the land and if outside BCAP project areas it must be a byproduct of preventive treatments that are removed to reduce hazardous fuels, to reduce or contain disease or insect infestation, or to restore ecosystem health. All eligible material must be harvested in accordance with an approved conservation, forest stewardship, or equivalent plan.

Matching Payments

For the matching payments, the USDA did choose one of the three options that were suggested in the draft rule in February. Matching payments for eligible materials will be made at a rate of $1 for each $1 per dry ton equivalent paid by a qualified biomass conversion facility, in an amount up to $45 per dry ton. The rule caps the amount of time an eligible material owner can receive payments at two years. According to the USDA, $250 million was distributed in matching payments during the NOFA period, which lasted roughly three months. This disbursement far exceeded initial projections. With changes in the final rule, the USDA estimates total expenditures of $461 million over 15 years.

The final rule also removed the requirement on arm’s length/related party transactions, replacing it instead with the requirement that all eligible material be purchased at fair market prices, regardless of the relationship between buyer and seller, allowing participation in BCAP for vertically integrated operations but preventing the inflating of biomass prices to gain higher matching payments.

Having eligible materials restricted to those not already used for higher-value products is a notable victory for the pallet industry and other low-grade lumber users that will provide a more level playing field as BCAP payments resume.

“BCAP has morphed from a job killing welfare program to one that now makes economic and environmental sense,” said Tom Julia, Composite Panel Association (CPA) president. “It is now targeted to the production of new sources of woody biomass, rather than raiding established, viable markets for the wood fiber upon which a wide range of American industries rely.”

The USDA suggests that with the proper limitations in place to reduce the opportunity for market distortions, BCAP now has a chance to do what it was intended to do: improve domestic energy security and spur rural economic development and job creation.